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Raising Capital & Securities Law Basics – Securities

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Capital raising involves significant legal risks and complex
securities law issues. All sorts of ownership interests sold in
exchange for investments and payment rights constitute
“securities” and their sale is subject to substantial
state and federal regulation. This includes corporate stock,
membership interests in LLCs, partnership interests, other
investment contracts, and can even include promissory

Under federal law, the offer or sale of securities is unlawful
unless the offering has been registered with the SEC or falls within
an exemption from registration. Because of this broad general
prohibition and the potentially severe consequences of violations,
business owners and entrepreneurs must be mindful of securities
laws when seeking investment capital. In most cases, they should
not sell securities without the assistance of qualified

The Core Objectives of Securities Law

The U.S. Securities Act of 1933 (the “Securities
Act”), similar state laws, and related administrative
regulations—have two core objectives:

  1. To protect investors by ensuring they receive adequate
    information concerning securities, and

  2. To prohibit deceit, misrepresentations, and other fraud in the
    sale of securities.

Generally, information is adequate and accurate if it
meaningfully enables the investor to evaluate the characteristics
and qualities of an investment—including the associated

The Registered Offering Requirement

One mechanism by which securities law achieves these objectives
is the requirement that a prospective sale of securities (an
“offering”) is registered with the SEC prior to any
“public sale.” The interpretation of that term can be
surprisingly broad. Unfortunately, however, registering an offering
is a very expensive proposition. Additionally, registration
subjects companies to onerous SEC reporting requirements. As a
result, registered offerings are often not a viable option for many

On Exemptions from the Registration Requirement

Thankfully, federal law provides several exemptions from the
requirement to register offerings. These exemptions seek to balance
investors’ needs for protection with the needs of businesses by
lowering the cost of offering securities. In doing so, the Congress
and the SEC seek to foster access to capital for relatively smaller
ventures. When it comes to smaller capital raises, these exceptions
can be said to “swallow” the general rule prohibiting
unregistered offerings: most capital in the United States is raised
by way of exemptions. Notwithstanding, registration exemptions are
not a “free for all.” Despite their wide availability,
the complexity and associated burden of compliance is

The various exemptions applicable to unregistered offerings
contain different guidelines. Relative to one another, certain
exemptions mandate enhanced disclosure, or other additional
requirements, to satisfy a perceived need for greater investor
protection. Typically, the larger the capital raise and the more
available the offering is to persons who don’t qualify as accredited investors, the stronger the
investor protections built into the applicable exemption’s

Whether a capital raiser should use a specific exemption depends
on several factors. These factors include:

  • the amount of investment sought;

  • how broadly the company wishes to promote the offering;

  • eligibility requirements, such as the stage of the development
    of the company or its business plan;

  • SEC filing requirements;

  • restrictions applicable to resale of the stock; and

  • whether the preemption of state securities laws is necessary or

Available Exemptions & Compliance with Disclosure

Exemptions from the federal registered offering requirement
include the following:

  • Private Offerings (or Private Placements) under Section 4(a)(2)
    and Rule 506(b) of Regulation D.2

  • General Solicitation Offerings under 506(c) of Regulation

  • Limited Offerings under Rule 504 of Regulation D.

  • Regulation Crowdfunding Offerings.

  • Intrastate Offerings under Section 3(a)(11) of the Securities
    Act, Rule 147, and Rule 147A.

  • Regulation A Offerings.

In every offering, issuers must comply with the anti-fraud
provisions of the Securities Act in addition to complying with the
guidelines of a registration exemption. Doing so means accurately
disclosing all material information relevant to the investors’
decision to purchase securities.

Some exemptions expressly include disclosure requirements, but
many do not. Securities practitioners have developed standard
practices that aid in offering mechanics, including the tradition
of creating a private placement memorandum or disclosure statement
which address the material terms of an offering and other

However, in certain industries when sophisticated investors
conduct significant due diligence, issuers sometimes rely only on
representations and warranties in stock purchase agreements to
comply with anti-fraud provisions. In evaluating compliance with
the anti-fraud requirements of the Securities Act, issuers should
consider the basis objectives of securities laws. To prepare to
meet the disclosure obligations associated with an offering,
capital raisers can reference publicly available tools, such as the
model disclosure form created by the North American
Securities Administrators Association
titled Form U-7 “SCOR” (Small Company
Offering Registration).


1. Note the breadth of the term “security” as
defined in the Securities Act: 15 U.S. Code § 77b(1)

2. A prior blog by the author discussing these exemptions
is available here: Fundraising for your Business through Private
Placements & Rule 506(b) – Freeman Law

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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